Japan Breaking Out: Be Long Nikkei, Short Yen

Janet Yellen, in her congressional confirmation hearing, suggested that the Fed will continue to do whatever is necessary to promote confidence, and with that, provide fuel for wealth creation via stocks and via a recovery in housing.

Japan (Wikipedia)

If anything was to be taken away from Yellen's first major message parsing before Congress, it was that the Fed will continue in ultra-aggressive mode until they see a "strong and robust recovery" -- the one phrase she said repeatedly.

Japan plays a huge role in the Fed's projections for the economic recovery timeline. The BOJ's massive undertaking to end two decades of deflation has all of the ingredients to do all of the things that the Fed's QE programs have been unable to do -- kickstart global economic growth. Unlike other developed market economies, which have various limitations with their abilities to devalue their currencies, the BOJ has the ability to devalue the yen dramatically, and that's a tool that can help the world recover from six years of economic malaise and create a real recovery.

The Japan trade has broken out of a six month consolidation phase. And both Japanese stocks and USDJPY look like they are ready to take off.

USDJPY had been forming a wedge that was likely to be resolved with a bullish breakout. That break level came in at the 99.05/10 area. And as you can see in the chart below, that gave way last week.

Now we have USDJPY back above 100. Given the technical and fundamental bullish backdrop for USDJPY, we will likely see USDJPY close above the April 2009 highs of 101.43 in short order. And with that achievement, it's a good bet we won't see sub-100 USDJPY from that stage for a long, long time.

Also yesterday, we broke the key 15,000 level in the Nikkei, ending a six month consolidation. It’s been my view that when that level goes, the international attention would turn aggressively to the Japanese stock market.

With this break, Japanese stocks are in a position for a huge end of year rally. This break of 15k should prompt the movement the Abe administration has been calling for. That is, for Japanese pension funds to reduce their massive JGB holdings in favor of stocks.

We've surpassed pre-crisis highs in U.S. stocks and German stocks. The pre-crisis highs in Japanese stocks are around 18,300. Don't be surprised if it tests before the year end.

3) Buy Japanese companies with high foreign-earned revenues. This gives these companies a natural partial hedge against a yen decline. Some of the large cap multinationals offer value and liquidity for global interest as it ramps back up in Japan. And they tend to have sizable multicurrency revenue. Some of these names include: Sony, Panasonic, Nintendo and Nomura.

4) For the currency component, there is the inverse ETF. ProShares UltraShort Yen ETF, symbol YCS, which is designed to gain 2% for every 1% decline in the value of the Japanese yen.

Finally, buy U.S. stocks. As the Abe administrations plan to weaken the yen continues to intensify, expect Japanese capital flows to continue into foreign equity markets, especially the U.S., where stability, growth and rate expectations are favorable relative to the rest of the world.